Freddie Mac 2010 Annual Report Download - page 22

Our Competition
Historically, our principal competitors have been Fannie Mae and other financial institutions that invest in mortgage-
related securities and mortgage loans, such as commercial and investment banks, dealers, thrift institutions, and insurance
companies. The conservatorship, including direction provided to us by our Conservator, and the restrictions on our activities
under the Purchase Agreement has affected and will continue to affect our ability to compete in the business of investing in
mortgage-related securities and mortgage loans.
We compete for low-cost debt funding with Fannie Mae, the FHLBs and other institutions. Competition for debt funding
from these entities can vary with changes in economic, financial market and regulatory environments.
Assets
Historically, we have primarily been a buy-and-hold investor in mortgage-related securities and single-family mortgage
loans. We may sell assets to reduce risk, provide liquidity, and improve our returns. However, due to limitations under the
Purchase Agreement and those imposed by FHFA, our ability to acquire and sell mortgage assets is significantly constrained.
For more information, see “Conservatorship and Related Matters” and “MD&A — CONSOLIDATED RESULTS OF
OPERATIONS — Segment Earnings — Segment Earnings-Results — Investments.”
We may purchase assets for a variety of reasons, including to improve investment returns. We estimate our expected
investment returns using an OAS approach, which is an estimate of the yield spread between a given financial instrument and
a benchmark (LIBOR, agency or Treasury) yield curve. In this approach, we consider potential variability in the instrument’s
cash flows resulting from any options embedded in the instrument, such as the prepayment option. Additionally, in this
segment we maintain a cash and other investments portfolio, comprised primarily of cash and cash equivalents,
non-mortgage-related securities, federal funds sold and securities purchased under agreements to resell, to help manage our
liquidity needs.
Debt Financing
We fund our investment activities by issuing short-term and long-term debt. The conservatorship, and the resulting
support we receive from Treasury, has enabled us to access debt funding on terms sufficient for our needs. The support we
received from the Federal Reserve through its debt purchase program, which was completed in March 2010, also contributed
to our ability to access debt funding. While we believe that the support provided by Treasury pursuant to the Purchase
Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct our
normal business activities, the costs of our debt funding could vary due to the uncertainty about the future of the GSEs and
potential investor concerns about the adequacy of funding available under the Purchase Agreement after 2012. Additionally,
the Purchase Agreement limits the amount of indebtedness we can incur.
For more information, see “Conservatorship and Related Matters” and “MD&A — LIQUIDITY AND CAPITAL
RESOURCES — Liquidity.”
Risk Management
Our Investments segment has responsibility for managing our interest rate risk and liquidity risk. Derivatives are an
important part of our strategy to manage certain risks. We use derivatives primarily to: (a) regularly adjust or rebalance our
funding mix in order to more closely match changes in the interest rate characteristics of our mortgage-related assets;
(b) hedge forecasted issuances of debt; (c) synthetically create callable and non-callable funding; and (d) hedge foreign-
currency exposure. For more information regarding our use of derivatives, see “QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK” and “NOTE 12: DERIVATIVES.” For information regarding our liquidity
management, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES.”
PC Support Activities
Our PCs are an integral part of our mortgage purchase program. Our Single-family Guarantee segment purchases many
of our mortgages by issuing PCs in exchange for those mortgage loans in guarantor swap transactions. We also issue PCs
backed by mortgage loans that we purchased for cash. Our competitiveness in purchasing single-family mortgages from our
seller/servicers, and thus the volume and profitability of new single-family business, can be directly affected by the relative
price performance of our PCs and comparable Fannie Mae securities. We seek to support the price performance of our PCs
through a variety of strategies, including the purchase and sale of PCs and other agency securities, as well as through the
issuance of REMICs and Other Structured Securities. Our purchases and sales of mortgage-related securities influence the
relative supply and demand for these securities, and the issuance of REMICs and Other Structured Securities helps support
the price performance of our PCs. Depending upon market conditions, including the relative prices, supply of and demand
for PCs and comparable Fannie Mae securities, as well as other factors, there may be substantial variability in any period in
the total amount of securities we purchase or sell, and in the success of our efforts to support the liquidity and price
performance of our PCs. We may increase, reduce or discontinue these or other related activities at any time, which could
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